US inflation has jumped higher than expected. Expectations of Fed rate tightening now prices for 6 or possibly even 7 rate hikes this year. Treasury yields have spiked higher, with the yield curve significantly bear flattening (the spread between 2 year and 10-year yields is now just 0.42%). Equity markets and commodities have fallen in response. However, there is also a feeling that the US dollar is not running away with its strengthening. Indices are lower today, but not sharply. There could be a sense that this move is being contained. Is the Fed really going to tighten by 150 to 175 basis points this year? We are sceptical.
Attention will move to the US Michigan Sentiment data later for more indication of how the US consumer is feeling and also its view on inflation.
Risk appetite is negative: USD is again stronger today (except for against GBP), with indices lower.
Treasury yields pulling back from spikes higher: Having spiked to 2.05% yesterday, the 10-year yield has unwound back to below 2% this morning. [Risk appetite stabilising]
US inflation spike: With US inflation spiking to 7.5% on headline CPI (higher than 7.3% exp) money markets are pricing for even more hikes by the Fed this year, now having 6 hikes priced in. The CME Group’s FedWatch tool is pricing a 95% probability of +50 basis points of increase in March.
FOMC’s Bullard hawkish: Hawkish comments from the most hawkish member of the FOMC caused the late surge in yields yesterday. Bullard favours +50bps in March and +100bps by July. He also suggested the Fed considered inter-meeting increases. [USD supportive]
UK growth data better than expected: December’s monthly growth showed a decline of -0.2% but this was better than the -0.7% forecast. [GBP outperforming]
Preparations for Russia/Ukraine conflict continue: US President Biden has advised US citizens to leave Ukraine. Diplomatic contact continues between the two sides. The UK Defence Minister is meeting Russian Foreign Minister Lavrov today.
Crypto rally continues to consolidate: The recovery in Bitcoin has lost its momentum this week and has tailed off since the inflation data. However, there is essentially still a consolidation between $42,500/$46,000.
- Michigan Sentiment (at 1500GMT). The headline sentiment is expected to improve slightly to 67.5 in February (from 67.2 in January)
MAJOR MARKETS OUTLOOK
Broad outlook: Broad negative risk appetite, with USD outperforming and indices lower. However, there is a sense of containment in the move, for now.
Forex: USD and GBP are the best performers, with AUD and EUR under the most negative pressure.
- EUR/USD has been volatile since the US inflation, but the move lower has held on to the support band around 1.1360/1.1385, for now. There is a negative near term bias but a sense of support forming in the European session. A close under 1.1360 would be negative and open a move back towards 1.1270/1.1300. Resistance at 1.1480/1.1495 has strengthened.
- GBP/USD support around 1.3490/1.3500 is holding firm and essentially the market is still in a near term range 1.3490/1.3645. Momentum on daily and 4-hour charts remains neutral.
- AUD/USD outlook is particularly uncertain after another bull failure around 0.7220 yesterday. Two negative candles on the daily chart leave a negative near term bias, but the market has ticked higher early today. Reaction around 0.7150/0.7170 resistance will be key. Initial support at 0.7105.
Commodities: Gold and silver are edging higher. Oil is consolidating around its 8-week uptrend.
- Gold has again fallen over just as the daily RSI approached 60. Pulling back from yesterday’s high of $1842 builds up resistance overhead. A tick higher this morning but if this move again fails around $1828/$1832 it would point to another pullback towards $1800. Initial support is at $1815.
- Silver mid the volatility of yesterday’s market moves, a shooting star candlestick has formed. This turns the near term outlook corrective again. A move under $22.77 would re-open the support band $22.00/$22.20. Initial resistance is now $23.10.
- Brent Crude oil has been choppy in the past 24 hours, with a bull failure at $93.55 now potentially a lower high under $94.55. There is more pressure on the 8-week uptrend today, with support at $90.45 increasingly important near term. A breach opens $88.40.
Indices: Big swings lower since the US inflation data, but can support start to form?
- S&P 500 futures have moved sharply lower to leave key resistance now at 4585. Reaction to support in the band 4438/4454 will be key. Futures are off earlier session lows, but a move above 4490 is needed to suggest sustainable support may be building again.
- DAX has been volatile in the past 24 hours but is off earlier lows of 15,285. DAX is now holding in the lower half of the medium-term range. Resistance at 15,623/15,742 is now key. Initial resistance today comes in at 15,475. The outlook on a near term basis is uncertain.
- FTSE 100 has pulled back from 7695 and has broken a two-week uptrend. For now, the correction is being contained, but the reaction to initial support at 7596 and then 7554 will be a gauge now. Support at 7502 is the first key higher low.